Not completely unpopular

Unless you’ve been under a rock today, two things are being talked about online. First, it’s International Talk Like a Pirate Day, so ’tis a fine day to bring out ye ol’ grog and get yer yarrrr on.

Secondly, the Netflix CEO made another blog post about the direction of their company and the internets are on fire…again. The post explains a lot, but let me give you the Cliff Notes version. Strategically, they want to split the streaming business and their DVD delivery business. They want to do this so they can focus their efforts and expand their offerings on each side with more streaming options on one side and adding video games and other items to their DVD side. The CEO apologizes for not communicating enough to his customers the strategy they had to pursue.

Apparently that wasn’t enough for raging internet users. “Screw you”, the users scream. They complain about a company out of touch with its users. They complain about the price increase. They complain that there will be two queues they’ll need to check. They’re also horribly misinformed about why this is happening.

Yup, most people failed to see that this summer, studios decided they were going to squeeze Netflix. God forbid that Netflix had found a profitable avenue the studios hadn’t forecast in some executive back-patting meeting. When they were the only game in town, the studios let them have access to their catalogs for probably less than they were worth, but still not cheap at five to ten million dollars per year. All of those contracts cost Netflix $180 million a year.

Those contracts are expiring and instead of renegotiating for something that makes more sense, in 2012, those contracts are going to increase to $1.98 billion dollars. That’s a ten fold increase. So what did Netflix do? Their hands were forced to impose a 60% increase on the lowest plans, splitting the old $9.99 for one DVD and unlimited streaming. Now if you wanted streaming only or one DVD at a time, it would cost $7.99. If you wanted both, it would cost $15.98. Customers howled that they had to pay an extra six bucks a month. “How dare they!” the customers shouted. A bunch of people cancelled their accounts and the stock plunged.

But it’s not like the CEO can come out and say “the studios are screwing us” because it’s bad business to mention that your suppliers are being jerks. That would truly be killing off their business because then the studios take the proverbial high road and not offer contracts to Netflix and effectively killing them anyway.

Splitting the business is the only avenue left to Netflix. The DVD business is fading and is competing with vendor machine businesses like Redbox. The DVD side can still deliver a huge catalog of films, but it can do so with a different contract strategy. This is just a guess, but adding streaming was complicating these contracts. Now, the DVD side named Qwikster (not a great name really, but who cares) can concentrate their efforts in DVD delivery and add things like video games to the mix. Netflix will be the streaming company and can focus it’s efforts in that direction.

The problem is that if Netflix fails, the studios win. Consumers can expect their outsized pricing on everything. It’s truly baffling to me to see on my PS3 that I can “rent” a movie for $2.99 and someone considers that a good deal. But that’s the price point that Sony decided they can best squeeze their customers. If Netflix fails, prepare for two things to happen. Amazon further fills this void and becomes more and more the arbiter of all things internet. Secondly, even if the studios reduce their pricing to something more palatable, you’re not going to get a wide variety of movies, just the stuff they studio can provide. The offerings get more segmented and convoluted. And get ready to see more and more unskippable commercials.

If Netflix fails, it’s partially because the studios put a gun to their head, but mostly because people balk at paying sixteen dollars a month for a DVD and streaming movie service.